Turkey Currency Crisis To Cement Focus On Renewables And Coal Power

The sharp depreciation and volatility registered for the Turkish lira over August 2018 has led us to revise downwards our near-term solar and wind capacity forecasts, as we expect fewer projects to gain financing in the near-term.

We maintain that renewable energy will remain an attractive investment in Turkey over the longer term, as lira weakness accentuates the importance of switching to domestically sourced power generation. This will also support an uptick in coal-fired power generation utilising domestic lignite deposits.

We forecast non-hydropower renewables to grow steadily in importance in the Turkish power mix, from 11% over 2018 to 21% by 2027. We also forecast coal to overtake natural gas as Turkey's biggest power generation source, with the sector's share of total power generation increasing from 32% to 33% from 2018 to 2027.

Forecast Changes

We have downgraded our solar capacity forecast, from an expected 5.8GW of total installed solar capacity by end-2018 to 4.7GW. We now expect a total of 12.8GW of solar capacity to be installed by 2027, down from our previous forecast of 14.7GW.

We have also revised down our wind capacity forecast from 13.5% to 11% over 2018, and from 18% to 12% over 2019. This is due to our expectation that financing issues, coupled with an already shrinking pipeline of projects under construction, will lead to a slowdown in growth over the next two years.

Currency Depreciation To Hit Near-Term Solar Expansion

Turkey - Solar Power Capacity Forecast, MW

f = Fitch Solutions forecast. Source: EIA, Fitch Solutions

We believe the steep depreciation of the Turkish lira in August 2018 will hit wind and solar growth in the near term, as financing will be harder to obtain. Over the longer term, government support for the sector will be cemented by the increasing urgency of reducing imports of natural gas, hard coal and electricity. This means that we have integrated a slowdown in capacity growth for the wind and solar sectors over 2018/19, but expect capacity growth to remain robust over the remainder of our 10-year forecast.

Our optimistic long-term outlook is based on our expectation that the renewables sector will remain relatively insulated to Turkey's currency woes. This is largely down to the Turkish government enabling wind and solar generators to tap into USD-denominated tariffs, in order to offset currency volatility risks ( see 'Renewables Outlook Constructive Amid Rising Risks', June 5 ). The weak lira also means that locally manufactured equipment will be more attractive to international investors, which can tap into bonus payments with local content in their projects. That said, lira volatility will mean that project developers will struggle more to obtain financing for new projects, and this is reflected in our near-term slowdown for wind and solar power capacity growth.

Beyond 2020, we maintain that renewable energy will remain a key source of government-driven power mix diversification efforts, with Turkey aiming to reduce it's reliance on imported hard coal and natural gas. The negative impact of feedstock imports has been accentuated by the weakness in the lira, and we expect the Turkish government to remain strongly in support of domestically sourced power generation such as wind, solar, geothermal, hydro and lignite coal-fired power. For the renewables sector, large-scale competitive capacity tenders will replace the feed-in-tariff as the main driver of capacity growth. This will reduce costs for new projects, making wind and solar facilities more attractive to the government. As such, we maintain that natural gas' share in the Turkish power mix will fall from 36% of the total over 2017 to 26% by 2027. Coal-fired power will also increasingly transition away from imported hard coal to domestically sourced lignite.

Renewables Key To Stemming Gas Demand Growth

Turkey - Power Generation By Technology, TWH (LHS) and Renewables Share Of Total Power Mix (RHS)

Our expectation that economic growth will slow, after real GDP growth totalled 7.4% over 2017, will further put pressure on natural gas and hard coal. Our Country Risk team's forecasts real GDP growth between 2018 and 2027 to average 3.3%, and this highlights that power consumption growth will be set to slow over the next decade. This, in turn, means that domestic power resources will take up a bigger share of the power mix, in line with efforts to reduce energy feedstock imports. We currently forecast power consumption growth in Turkey to average 4.2% between 2018 and 2027, down from the 7% registered over 2017. Should consumption growth slow more than we expect, natural gas power usage would decrease accordingly.